Consolidation afoot in the West-African Gold-Mining Sector?

John McGloin: “Deals have to answer questions, not make the question bigger”

A mass roll-up of gold assets in West Africa, touted by analysts and investors as the ultimate upshot of gold’s current weakness, is unworkable and unlikely to happen, says John McGloin, chairman of London-based Amara Mining.

Predicting a gold consolidation drive in West Africa has become a favourite theme for brokers in London and Toronto: the region is “ripe for consolidation,” according to analysts at Jennings Capital, with three or four players coming “to dominate the sector,” according to California-based Sprott. Clarus Securities in Toronto has also said it is time for the “long awaited West African consolidation.”

Under-explored terrain across the region created a dense crowd of companies during the last gold bull market, according to the case for M&A, generating potential savings through the coupling of pair-able assets.

“All these juniors have a head office, listing fees, lawyers, brokers,” according to Dan Betts, chief executive of Mali-focused Hummingbird Resources. “It’s a big expense for a cash-strapped, high-need, beaten-up junior, but if you put ten of them together, you still only have one corporate overhead, one broker, one set of costs.”

Whilst there has been some deal flow, with Asanko Gold swallowing PMI and B2Gold buying Volta Resources, other tie-ups have fallen through or failed to materialise.

Gun Shy

Amara’s chairman John McGloin, a former mining analyst at Arbuthnot and Collins Stewart, says there is one show-stopping reason why rampant consolidation in the region has been hindered: West African governments are loath to see projects put on the back-burner, forcing a consolidated entity to develop multiple projects at once.

It would be an impossibly expensive task, likely to destroy shareholder value, he says. “Deals have got to answer questions, not make the question bigger. What’s hamstringing the industry is a lack of capital.”

Agreements pushed through at the top of the market have led to a raft of board changes across the mining industry, replacing asset-hungry chief executives with more cautious custodians of capital. Many are therefore “gun-shy” when it comes to striking deals, says McGloin, who joined Amara in 2012.

“People very rarely buy when there’s good value out there. Deals tend to go through at the top of the market, they were value destroying and those people have fallen on their swords.”

Hype

McGloin, who also stepped in as chief executive in 2014, has earned a reputation for not over-talking his projects, saying mining bosses who hype their assets alienate investors, doing the industry a disservice.

When Amara published a feasibility study for its Baomahun project in Sierra Leone last year, analysts asked whether it was “worth the effort,” in light of gold prices. McGloin appeared to agree, telling investors that Amara “certainly won’t rush out and issue shares. We can’t. That would be highly dilutive.”

Yaoure

He has instead refocused Amara around its Yaoure project in the Ivory Coast, drilling out what is now West Africa’s largest undeveloped gold project, counting 6.8m gold ounces grading 1.2 to 1.3 gold grams per tonne.

Amara, which was itself recently touted as a takeover target by analysts at BMO, is currently working on options to lower cap-ex at Yaoure from $440m by lowering the project’s pre-strip, the quantity of rock that needs to be moved before accessing the underlying gold ore.

The company is planning to apply for a mining license this summer, McGloin told Master Investor. Shares closed on Tuesday at 13.75p, valuing the company at £58m ($91m).